As Investors Flee China Rout, Bargain Hunters Turn to Hong KongYe Xie and Aleksandra Gjorgievska
Bargain hunters looking to take advantage of a Chinese stock market rout that’s wiped out $2.4 trillion in value since mid-June are casting their lots outside the mainland.
BlackRock Inc.’s $8.1 billion ETF tracking Hong Kong-listed Chinese companies lured $588 million last month, the second biggest inflow since December 2012. At the same time, investors pulled a record $337 million from the largest U.S. ETF investing in their mainland-listed equivalents.
While the Shanghai Composite Index’s 24 percent slump from its June 12 peak has sent investors fleeing, Hong Kong-listed securities, known as H-shares, are less vulnerable to the unwinding of leverage bets that’s helping fuel the rout, while their cheaper valuations provide better protection from further market slumps. Dual-listed companies are trading more than 20 percent cheaper in Hong Kong than on the mainland, data compiled by Bloomberg show.
“Investors are starting to see H-shares as representing good value relative to the excessive valuations of those other stocks,” Allan Conway, head of emerging market equities at Schroder Investment Management Ltd. in London, said by phone. “There will be some switching because of the valuation gap.”
The Shanghai benchmark is heading for the largest three-week decline since 1997 as government measures, including relaxing margin-trading rules and cutting transaction fees, fail to shore up confidence and keep leveraged traders from selling holdings to pay back the money they borrowed to buy shares. A five-fold surge in margin debt had helped propel the gauge up more than 150 percent in the 12 months through June 12.
Hong Kong Discount
While H-shares lagged in the run-up, they have fared better during the selloff. The Hang Seng China Enterprises Index has declined 8.6 percent in the past three weeks, trimming gains over the past year to 22 percent.
Even after the recent outperformance, Hong Kong-listed stocks are still trading at a 22 percent discount to their mainland counterparts, known as A-shares. They were at par as recently as in November.
“Investors feel safer investing in H-shares,” Clem Miller, an investment strategist at Wilmington Trust, which manages $20 billion, said by phone from Baltimore. The mainland market reflects “the whole fear-and-greed cycle,” he said.
BlackRock’s U.S.-traded iShares China Large-Cap ETF, which invests in Hong Kong-listed companies including Tencent Holdings Ltd. and China Construction Bank Corp., added $208 million in two weeks through July 1 even as the selloff deepened.
In comparison, investors yanked $176 million from the $890 million Deutsche X-trackers Harvest CSI 300 China A-Shares ETF, the largest U.S. fund tracking mainland equities, during the same period. Short interest in the ETF rose to 22 percent of shares outstanding Thursday, the highest since the fund started in November 2013, according to data compiled by Markit and Bloomberg.
Hong Kong-listed Chinese companies are dominated by large state-owned enterprises, which tend to be less volatile. Financial and energy companies, including Industrial & Commercial Bank of China Ltd., the the world’s largest lender and PetroChina Co., the nation’s biggest oil and gas producer, account for 84 percent of the Hang Seng China Enterprises Index.
The gauge traded at about 9 times 12-month earnings, compared with a multiple of 15 of the Shanghai benchmark, according to data compiled by Bloomberg.
Unlike the mainland exchanges where individual investors account for 80 percent of trading, the H-shares are owned by global pensions, insurance companies and other institutional funds, making it a “more rational” market, said Arjun Jayaraman, who helps oversee $4 billion as a money manager at Causeway Capital Management LLC in Los Angeles.
“The valuation on the H-share market is just much more compelling than the A-share market,” said Jayaraman, whose $1.8 billion Causeway Emerging Markets Fund returned 7.3 percent annually over the past five years, outperforming 95 percent of its competitors. “The H-share market is a more institutional market; this is what global managers invest in. We are not as momentum-driven.”
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